Although the Bank of England (BoE) left interest rates on hold once again with a unanimous vote this failed to prevent the Pound to US Dollar (GBP/USD) exchange rate from surging higher.

Demand for the Pound (GBP) picked up significantly in the wake of the BoE’s policy announcement, with the underlying message proving more hawkish than anticipated.

As James Smith, Developed Markets Economist at ING, noted:

‘The Bank of England has unanimously voted to keep rates on hold today, but it caught markets off-guard with its surprisingly bullish outlook for the economy and interest rates. The main message today is that the key arguments underlying the Bank’s decision to hike rates in November – expectations for stronger wage growth and higher, global demand-driven economic growth – are materialising, and in some cases, materialising faster.’

Even so, BoE Governor Mark Carney did emphasise the caveat that the central bank’s outlook is still very much dependent on developments regarding Brexit.

Nevertheless, the GBP/USD made solid gains as markets moved to price in higher odds of a May interest rate hike.

Comments from Philadelphia Fed President Patrick Harker offered additional support to the GBP/USD exchange rate, proving a little more cautious in nature.

As Harker expressed a preference for just two or three interest rate hikes over the course of 2018 this prompted investors to re-evaluate the likely pace of Fed monetary tightening.

While Harker is not currently a voting member of the Federal Open Market Committee (FOMC) this was still enough to dampen the mood towards the US Dollar (USD).

With fresh US data rather thin on the ground ahead of the weekend USD exchange rates naturally struggled to maintain their recent bullish run.

However, if other Fed policymakers opt to take a more optimistic view in the coming days this could see the US Dollar quickly return to a stronger footing.

Higher UK Inflation Forecast to Boost Pound (GBP) Exchange Rates

Fresh volatility looks to be in store for the GBP/USD exchange rate next week, with focus turning towards January’s UK inflation rate.

If inflation picks up once again this could give the BoE greater incentive to raise interest rates, boosting the odds of a May rate hike further.

Any easing in inflationary pressure, meanwhile, could send the Pound into a fresh slump against its rivals, even though this would bode well for the domestic economy.

With consumers still suffering from a severe wage squeeze any let-up would be welcome, encouraging further spending and potentially reducing household reliance on credit.

As high levels of consumer spending have been a major driver of economic growth in the wake of the Brexit vote a weaker inflation reading could still be considered positive for GBP exchange rates.

However, the latest developments surrounding Brexit are likely to prompt additional volatility for the GBP/USD exchange rate, particularly if the Conservative government’s position continues to harden.